Management Accounting and Reporting: Essential Requirements, Methods, and Tools

This document provides an overview of management accounting, including its definition, essential requirements, and different methods used for reporting. It also discusses the use of planning tools in management accounting. The document includes case studies and examples to illustrate the concepts. Study material, solved assignments, and essays on management accounting are available at Desklib.

Management
Accounting System

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
P1: Explain management accounting and give the essential requirements of different types of
management accounting systems................................................................................................3
P2: Explain different methods used for management accounting reporting...............................5
TASK 2............................................................................................................................................6
P3: Calculation of costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs...........................................................................6
TASK 3............................................................................................................................................9
P4: Explaining the use of planning tools used in management accounting................................9
TASK 4..........................................................................................................................................12
P5: Comparing how organisations are adapting management accounting systems to respond to
financial problems.....................................................................................................................12
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting can be defined as a integrative process that includes
identifying,measuring, analysing, interpreting as well as communicated the useful and accurate
information to the manager (Bhimani, 2020). It mainly concentrates on informing the
management of the company about all the metric that is essential for managing the operating of
the company. In today's changing times management accounting is very much beneficial and is
widely being used in many Organizations.
Prime Furniture, is one of fast growing company of London that offering wide variety of
furniture equipments. The company has been incorporated in Birmingham, England. This report
is undertaken in order to aid the company to provide an adequate understanding of Management
accounting. Management accounting also covers various aspects of it including essential
requirements, it's different methods and apply them in preparing the financials, different
planning tools. In addition for this, it will also be useful to understand how the management
accounting aids in solving financial problems.
TASK 1
P1: Explain management accounting and give the essential requirements of different types of
management accounting systems.
Management accounting is useful tools that helps the financial managers in preparing
important financial statements that includes income statements, balance sheet and cash flow
statements. It is useful for the management in interpretation of the financial information of the
particular period and make crucial decisions in context to day-to-day operations. It has resulted
in very effective decision making. They are governed primarily of the basics of four principles
that can be explained in detail below:
Influence: Communication is one of the critical part that has a large influence of the working of
the organization (Bromwich and Scapens, 2016.). This further boosts in improving the
decision making process. The clear and appropriate communications in respect of
management accounting improves it' s effectiveness by combining the diverse thought
processes. This is further useful for the different department to be at the same level as
working of different department have a huge impact of one another and thereby on the entire

company This is useful in making necessary changes required and in turn aids in making
timely as well as informed decisions.
Relevance: It is a common fact, that information is important for one and one. This is highly
dependant on the individual as well as the company that which information is important to
them in order to achieve their desired objectives (Chenhall and Moers, 2015.). The
management accounting acts as a support and provide access to all the resources that ensures
all the information required is made available. This is due to that, decision is highly
impacted by the decision-method employed and also by the individual making the critical
decision for the company. Therefore, it is important to have proper understanding the
requirement of all the shareholders . As their main motive for operating their business is to
undertake the wealth maximization of all their shareholder.
Value: The influence of value is predicted. Management accounting is useful for the
Organization as it link's their respective processes to it's main goal for which they have
come into existence. For doing this, it is must to have a detailed knowledge of the latest
developments that is must for them to know in order to operate and survive in the industry.
This is must for them to utilize the most appropriate opportunity by examining the expenses,
risk ,expenses and mainly the value they will be able to generate for the chosen
opportunity.
Creditability: By being responsible and regularly monitor the activities at each levels aids in
making the decision making process by mainly concentrating on their purpose of existence
(Drury, 2018). This aids the management to enhance trust among their shareholder in
addition to improving their reliability. Due to this reason, the managers who have gained
much experiences and have expertise associated with it are recognized for being ethical,
responsible as well has a higher interpersonal commitments.
It is essential to understand the different management accounting system in order to
generate the required as well as authentic information in order to be profitable. It is must for the
company to be successful in long term. Some of the main types of management accounting
system can be discussed below:
 Job costing system: It can be defined as a costing system that assigns the manufacturing
cost to each of it's individual product while monitoring all the expenses associated to it.
This is a detailed procedure that starts with receiving inquiries, estimating the price of a

particular job . Accordingly order is placed by the customer by undertaking the process
of production as per the specification of them in order to be able to complete their order
within the stipulated time.
 Cost accounting system: This method of costing enables the company to estimate the
cost while carefully analysing the company main indicators that includes profitability,
inventory as well as cost control (Jansen,2018.). There are two essential factors that are
considers for making it a good accounting system that include making proper co-
ordination as well as being highly flexible.
 Inventory management system: It is mainly concentrated on supervision as well as
management of stock as well as all the non-capitalized assets. This mainly includes
forecasting powerful strategies as well as managing the inventory effectively.
P2: Explain different methods used for management accounting reporting.
In every type of business, whether big or small to prepare as well as maintain different
type of management reports (Lavia López and Hiebl,2015.). This useful for the company to have
access to information that includes reducing costs, rewarding higher performing employees as
well as invest or divest a product line that help them earn maximum return that is must for them
to earn higher financial returns.
Some of the different methods can be explained below:
 Budget Report: This report is mainly useful for the small business as it will aid the
company in analysing it's business performance and also controlling it's cost. The budget
that is estimated for the future period is mainly utilize to compare the actual expenses
with respects to the previous years. If the company was over budget in the previous years
and is unable to find the appropriate method to cut down cost then they need to increase
with the amount that is required in order to reach at the desired level. In addition to this, it
can be used by the managers to provide them incentives to each of their efficient
employees.
 Accounting Receivable Ageing Report: This report is most important for managing the
cash flow of the company if it wishes to extend credit to their customers. It further
bifurcates the customer's on the basis of time period the company has extended the credit
to them. In most of these reports, there are separate column for the customer's who have
delayed thirty ,sixty days and ninety days in paying their dues. This report aids the

managers to analyse issues faced by the company in their collection process. If large
number of their customer's aren't able to pay their dues then it is must for them to
increase the strictness in their credit policy. This is mandatory, as it is must for
maintaining minimum cash as may have adverse effects on their liquidity.
 Job Cost Reports: This report show the important expenses that are necessary required
to be incurred to finance their business. This aids the manager in order to predict it's
expenses in context of their profitability. This further is useful for them to identify their
higher earning areas and saves our times on wasteful activities that has resulted in very
lower profit margin or even loss.
 Performance Reports: These reports are mainly created in order monitor the
performance of each of their employee's and ultimately the performance of the entire
company (Messner, 2016). In the large organisation, these reports are created for each of
the different departments in order to make strategic decisions that is useful for the
company to get successful for the company in growing the future period. This help the
higher performers to get rewarded while under performers are either motivated to reach
to their full potential or laid off to reduce their wasteful expenditures. This is one most
vital report for any company in order to devise powerful strategies in order to reach
nearer to their mission.
 Other Managerial Reports: All the other reports are included under this report (Van
der Stede, 2015). These report particularly includes Order information reports, project
reports, competitor's analysis reports and many other reports. The best decision-making is
highly dependant on the capability of an individual and company to handle all the
reporting requirements.
TASK 2
P3: Calculation of costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs.
Prime Furniture's Marginal Cost Statement Of Profit for the first quarter
Workings(£) First Quarter 2020(£)
Sales 66000

Cost of Sales
Opening Inventory - - -
Variable 78000*0.65 50700
________
50700
Less: Closing
Inventory
12000*0.65 7800
________
-42900
________
Contribution 23100
Less: Fixed Cost -16000
Less: Fixed Selling and
Administration Cost
-5200
________
Actual Net Profit 1900
Prime Furniture's Marginal Cost Statement Of Profit for the second quarter
Workings(£) Second Quarter
2020(£)
Sales 74000
Cost of Sales
Opening Inventory 12000*0.65 7800 -
Variable 66000*0.65 42900
________
50700
Less: Closing
Inventory
4000*0.65 -2600

________
-48100
________
Contribution 25900
Less: Fixed Cost -16000
Less: Fixed Selling and
Administration Cost
-5200
________
Actual Net Profit 4700
Prime Furniture's Marginal Cost Statement Of Profit for the first quarter
Workings(£) First Quarter 2020(£)
Sales 66000
Cost of Sales
Opening Inventory - - -
Finished Goods 78000*0.85 66300
Less: Closing
Inventory
12000*0.85 -10200
________
-56100
________
Actual Gross Profit 9900
Less: Fixed Selling and
Administration Cost
-5200
________
Actual Net Profit 4700
Prime Furniture's Marginal Cost Statement Of Profit for the second quarter

Workings(£) Second Quarter
2020(£)
Sales 74000
Cost of Sales
Opening Inventory 12000*0.85 10200 -
Finished Goods 66000*0.85 56100
Less: Closing
Inventory
4000*0.85 -3400
________
-62900
________
Actual Gross Profit 11100
Less: Fixed Selling and
Administration Cost
-5200
________
Actual Net Profit 5900
Prime Furniture's Absorption Cost and Marginal Cost Reconciliation
First Quarter
2020(£)
Second Quarter
2020(£)
Profit using Absorption Costing 4700 5900
Less: Closing Inventory*Fixed Overhead Rate
Add: Opening Inventory*Fixed Overhead Rate -
________ ________
Profit using marginal costing 1900 4700

TASK 3
P4: Explaining the use of planning tools used in management accounting.
There are various tools used in management accounting which helps the organisation to
make plans and develop strategies which helps the organisation to grow and expand.
The various tools used in management accounting are generally classified into following groups;
Financial Planning:
Any business' main objective is to maximise profits. Businesses are done to earn profit
and to grow. This objective is achieved by taking decisions in favour of the growth and
sustainability of the business. This is done by taking good financial decisions and making a good
financial plan. Financial Planning is considered one of a potent tool which helps in achieving
business objectives.
Advantages:
 It helps to forecast better planning to attain task and its practises within better manner
from which profit get to attain within effective manner.
 Financial planning also helps to make proper decision making effectively.
Disadvantages:
 It contains more time consuming.
 Through financial planning it will require more experts advice as well as it allows more
business techniques.
Production Budget:
It is a Budget which can be used for the purpose of ensuring that the different types of
production requirements of the organization are pre-determined and therefore in this way can
help the companies.
Advantages-
 This budget is helpful for the organizations because it leads towards ensuring that the
attainment of the goals and objectives can be done.
 The use of this particular budget can help the firms because it can be helpful in
identifying the excessive costs.
Disadvantages-
 The use of this type of budget can create disadvantage for the organizations because it is
costly to prepare and requires a lot of time.

 The preparation of this type of budget requires that the use of high-level of skills is made.
Sales Budget-
In this budget, an accurate assessment of the sales within the organizations within a
particular period of time is made which can be quite useful for them.
Advantages:
 This budget is helpful in ensuring that a proper determination of the sales can be carried
out within the organizations which can be quite helpful for the purpose of preparing a
right strategy
Disadvantages:
 It may not effectively forecast the future sales within an organization.
Master Budget-
It is a Budget which can be prepared by the organizations because by preparing it they can
get a comprehensive overview of the overall picture in the right manner effectively and
efficiently.
Advantages:
 By using of budget is more helpful and also makes ensuring about small overview of
entire organisation can be carried away.
 Through better using of helping raising the overall efficiency and effectiveness.
Disadvantages: For preparing about better budget leads of lack of organisation. This can create more
impact on company budget process. On the basis of this budget is more require effective application of higher skills. Thus it
would get impact on better productivity.
Other financial planning Tools can be measured:
1. Financial Statement Analysis: This tool analyses the financial statement of the business
for different periods, this analysis helps the organisation to know the rate of growth and
other aspects of the business. Profit and Loss account and Balance Sheet are two of the
important financial statements. This analysis is done through commparative financial
statements, common size statements and ratio analysis.

2. Cost Accounting: Cost accounting helps the management to assess cost particular to the
department. For example it helps the business to ascertain the cost data according to
products or production department, likewise it helps in ascertaining costs of processes,
departments, branch etc. Then the costs are compared with the budgeted or the
predetermined cost which was set by the management which helps the organisation to
determine the reasons responsible for the difference between the budgeted and actual
cost.
3. Fund Flow Analysis: This tool helps the management to find out the assess the
movement of funds from one period to another. This analysis determines whether the
funds the funds are used properly or not in the present year or the year of analysis
compared to the budgeted figures. This analysis further helps in identification of working
capital changes and funds from operations.
4. Cash Flow Analysis: The movement of cash within a certain period can be determined
by cash flow analysis. This helps the management to figure out the changes in cash
balance and why did they occur, further, jit also helps in determining the changes as per
the time period. It also helps in classifying cash flow from operations and the movement
of cash in a period.
5. Management Information System: Many scholars consider this as a part of
management accounting tools. This tool ensures free flow of information within the
organisation as it is really important for the business because it is essential for effective
functioning of business. The management usually designs a system through which
employees of the organisation can access the respective information and helps them in
understanding their duties discharged by the management and also to take quality
decisions.
6. Statistical Techniques: Statistical techniques helps the management to remove
management problems. These techniques help the management in every aspect where
some quantity is involved. These techniques makes it easier for the management to
compare the results and also to maintain the desired stock of goods. Some of the majorly
used statistical techniques are Methods of least square, regression, quality control,
inventory management etc.

TASK 4
P5: Comparing how organisations are adapting management accounting systems to respond to
financial problems.
Financial Problems: Sufficient financial resources are needed for the smooth
functioning of any business or organisation. There may come many financial problems for the
business where the finance is inadequate. These problems come when decisions taken by the
management are not efficient. Commonly this is faced by small and medium-sized businesses
and organisations, because they are not able to take efficient management decisions as they do
not follow management accounting systems. Prime Furniture is working on getting more
financial resources which can be managed by Management Accounting Systems.
Unavailability of performance measurement system: Prime Furniture is a medium-
sized enterprise with best in class services. With a strong local market the company is doing
well. But it is not using any performance measurement technique or system which does not allow
identification of any shortfall or shortcoming in the performance. This further creates problems
in departments and to the employees.
Problems in recognising core competencies: Prime Furniture is suffering from this
problem because they are not able to recognise and identify competencies of various
departments. It face issues related to finance and is unable to identify the weaknesses and flaws
of departments. That's why the company suffers from finance related problems.
Financial Governance: Financial governance is a feature of management accounting
system. This helps the business to run effectively and efficiently with proper ethical workings
and abiding by the law. With this corruption and illegal activities in businesses has been reduced.
Financial governance helps the business to work in a systematic manner and follow the rules of
accounting and its standards.
Below cited techniques can help Prime Furniture to overcome its drawbacks:

Management accounting
techniques
Reverting to the financial problems by using management
accounting system
Prime Furniture Lemon Furnitures
Benchmarking Prime Furniture face problems
in financial resource segment
because it is unable to measure
department's performance and
its sales are also decreasing.
Management of the company
can use benchmarking, this
tool helps to set bars, standards
and benchmarks. With these
standards management can
identify performance and
measure efforts and
performance of each
department. With the help of
benchmarking they can form
policies to solve problems.
The company faces financial
problem due to their inability
to identify weaknesses and
strengths of their departments.
With the usage of key
performance indicator method,
management with the help of
indicator can identify the
department which is providing
strength to the company.
Advising to Prime Furniture to
use technique of
benchmarking:
With the application of Key
performance indicator, Prime
Furniture will be able to form
a plan for the future to solve
and control problems related to
finance. By setting KPI they
will be able to control cash
outflows of business activities.
Balanced scorecard This is a technique which
helps to analyse performance
by measuring scorecard. Prime
With the use of balanced
scorecard department of
management of Lemon

Furniture use this for
recognition of balances in
finance department.
Furniture gives attention on
departments that do not
complete target in allotted
period of time. And on the
basis of this they form policies
for future.
CONCLUSION
This can be concluded from the above mentioned report, the management accounting will
be beneficial for them in improve the efficiency and particularly the financial performance of
the company. This can be done by them have a proper understanding of the management
accounting and applying it's different tools and technique that are already described above. In
addition to this, it is must for them to utilize the most appropriate planning tools that will further
be fruitful for them in cost controlling and enhance their financial performance.

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